E.T.F.’s Are Sailing Offshore. Should You Climb Aboard?

THE people who earn their living by coming up with new exchange-traded funds seem to have a touch of wanderlust.

In recent years, they have created single-country E.T.F.’s that span the globe, from Malaysia to Mexico. They have spun out a host of regional and global stock funds, too, enabling individual investors to plunge into exotic stocks from the comfort of their living room.

That is not how many experts would advise using E.T.F.’s that invest in foreign stocks. Some advisers say that the regional — and even some single-country — funds can be suitable in small amounts for individual investors, while others recommend only the broadest E.T.F.’s. Still others question whether E.T.F.’s are the best way to invest abroad.

For example, Gary Schatsky, a fee-only financial planner in New York, said that he often invested his clients’ money in broad-based domestic stock E.T.F.’s, but that he rarely made use of foreign stock E.T.F.’s. He said that foreign investing was one area where he thought that his clients might be better off in well-managed traditional funds.

“I am normally willing to pay some additional overhead for quality research when it comes to foreign investing,” Mr. Schatsky said, because the data available on public companies in some foreign countries can be a bit thin. Unlike actively managed funds, E.T.F.’s are only as good as the index on which they are based. “They buy a basket of stocks almost blindly,” he said.

Mr. Schatsky said that this was even more of a concern for emerging markets. And he was particularly wary of single-country funds.

“People often fall into the trap of thinking they are diversifying their portfolios by buying one of every E.T.F.,” he said, “so they buy Thailand and Malaysia.” He equated that with roulette — “putting all your money on red.”

But other investment experts say that foreign stock E.T.F.’s — including a few of the single-country funds — can be appropriate holdings for some individual investors.

David Darst, the chief investment strategist of the global wealth management group at Morgan Stanley, said he thought the stocks of commodity producers might now be a better deal than buying the actual commodities. He said that one way to invest in these stocks was through an E.T.F. that focused on a commodity-based country.

He mentioned Russia as a case in point. Although its stock market is heavily weighted with the producers of raw materials — like oil, natural gas and gold and other metals — he said the stocks were being discounted because of political concerns. “That market should be up more than it is, but people are worried about the presidential succession,” he said.

Michael Metz, the chief investment strategist at Oppenheimer & Company, favors E.T.F.’s that invest in Brazil, because that country produces many of the commodities that he thinks will benefit over the next few years — including agricultural crops that he said would benefit from a push for biofuels like ethanol. Mr. Metz said that investors who did not want to buy a single-country fund might opt for an E.T.F. that invests in Latin America.

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Mr. Metz said he also liked Canada because it produces many different types of commodities that are in high demand. “My judgment is that oil prices don’t go down,” he said. “But if you buy a Canada fund, and oil prices go sour, metals might go up. So you have several arrows in your quiver.”

Executives at some of the largest E.T.F. companies say that all of these funds were created in response to demand from institutional investors, including financial planners, who ultimately are investing money for clients.

James Ross, the senior managing director in charge of E.T.F. product management at State Street Global Advisors, said that the regional and single-country funds allow financial planners to make “tactical” investment decisions. For example, he said a financial planner could construct a broad portfolio of foreign stocks, while overweighting a particular region — say, Latin America or the Middle East — if the planner expected that region to thrive over the next 5 or 10 years.

But Mr. Ross cautioned individual investors not to focus too much on single-country or narrow regional funds. “I can’t see building a portfolio around only those types of E.T.F.’s,” he said. “Frankly, I think that would be dangerous.”

Vanguard has taken a somewhat different tack from other fund companies, by creating only five broad-based foreign E.T.F.’s.“We always keep our eye on new areas of investing, whether it be regions or categories,” said Martha G. Papariello, the principal in charge of Vanguard’s financial adviser services business. “But you won’t see Vanguard launching 100 different country E.T.F.’s.”

Ms. Papariello said that investors who wanted to diversify a portfolio that was mostly or entirely in domestic stocks could start with an E.T.F. like the Vanguard FTSE All-World ex-US fund,or the Vanguard Europe Pacific fund.

The Europe Pacific fund is based on the Morgan Stanley Capital International EAFE index — for Europe, Australasia and the Far East . But Vanguard has also split the components of the index by offering the Vanguard European fund, which includes only the European stocks, and the Vanguard Pacific fund, for the Asian and Australian stocks.

Ms. Papariello said Vanguard had done this so that individual investors and their financial planners could tweak their allocations. She listed several reasons they might want to do so. Some advisers may have strong opinions about which of these two regions will outperform. Others may not want to overweight one country — Japan is almost 70 percent of the Pacific portfolio — so they can buy both funds, but emphasize the European stock fund.

Still others, she said, may have clients who want the Pacific fund only for diversification, because they already own a portfolio of European stocks.

BEFORE buying any of these funds, experts say, investors should be mindful that — unlike many traditional mutual funds that own foreign stocks — the E.T.F.’s do not hedge currencies.

That has benefited many investors during the dollar’s long, painful slide of recent years. But with the dollar now at historic lows, investors should be aware that they might make money from owning foreign stocks while losing money on exchange rates.

Mr. Schatsky said that investors could also miss some tax advantages if they held these funds in tax-sheltered accounts, like an Individual Retirement Account. In that case, he said, they would not get the benefit of low capital gains tax rates or of writing off capital losses. And investors would not be able to deduct the foreign taxes that they pay. “You’re not exempt from paying Malaysian taxes just because you have a U.S. I.R.A.,” Mr. Schatsky said.

A version of this article appears in print on , on page 36 of the New York edition with the headline: E.T.F.’s Are Sailing Offshore. Should You Climb Aboard?. Order Reprints|Today's Paper|Subscribe